Accounting for the World

In an exclusive interview with CFO.com, the chairmen of the International Accounting Standards Board and its parent organization explain their "huge ambition."Tim Reason, CFO.com | USJuly 10, 2008

At the same time that the Securities and Exchange Commission was hosting a roundtable about the impact of fair value accounting on U.S. companies in Washington, D.C. yesterday, another meeting was taking place just three miles away that could have a huge impact on all accounting for U.S. companies.

For the past two days, the trustees of the International Accounting Standards Committee Foundation — the parent of the International Accounting Standards Board — have been meeting to discuss changes to their constitution. The topics — how the committee is funded, and how it would work with a proposed international monitoring group — might seem pretty arcane internal matters.

But they're not. The Securities and Exchange Commission may have recognized International Financial Reporting Standards for foreign companies listed in the United States and even solicited feedback about moving U.S. companies to IFRS. But until the IASC has stable funding and international oversight, the seeming rush to abandon U.S. generally accepted accounting principles in favor of IFRS can't legally happen.

Under the Sarbanes-Oxley Act, the SEC can only recognize accounting standards as "generally accepted accounting principles" if they are set by an independent organization that has stable funding. Paradoxically, that means that the SEC must have enough oversight of the group to ensure it is stable and independent.

That oversight, in turn, hinges on the development of an international monitoring group of securities regulators that would include the SEC and that would have substantial input into the appointment of IASC trustees.

During an interview during a break in their meetings, CFO.com asked IASC Chairman Gerrit Zalm and IASB Chairman Sir David Tweedie about recent developments in IFRS, and what they will mean for U.S. companies.

First of all, what significance, if any, should be attached to the fact that this portion of IASC's constitutional review is being held in Washington, D.C.?

Zalm: It's purely accidental — we normally gather in July in Washington or [somewhere] in the U.S. — so there is no deeper meaning. But of course we are happy with developments in the United States as far as IFRS is concerned. And we hope that the new SEC commission will like those proposals.

What particular developments are you pleased about?

Zalm: Well, what particularly pleases us is the reconciliation [requirement] is gone for all non-American companies on the New York Stock Exchange and the SEC has put forth the idea that American firms could apply IFRS also. There is a general consensus at the SEC, but also at FASB, that principles-based [accounting], which is IFRS, is superior to a rule-based system. So I think a lot of that is very positive.

Some of your documents say that it is a "clear organizational objective" of IASB to become "the world’s accounting standard-setter." So, that is your official goal?

Zalm: We have a huge ambition. We are getting along fine — there are already about a hundred countries prescribing IFRS or allowing it, and there are a lot of other countries converging to IFRS or telling us they will adopt IFRS, so there is real momentum. Of course the U.S. is an important part, but I'm confident the U.S. will, in the not-too-far future, adopt IFRS.

In that case, do you anticipate the SEC announcing a date for U.S. adoption sometime this summer, as some people have said might happen?

Zalm: I can't speculate on that. That would be nice, but probably the SEC will put forward some conditions if they announce a date. But we'll have to wait for a communiqué from the SEC.

When do you think the United States would be ready to adopt IFRS? The two most mentioned dates seem to be 2011 or 2013.

Zalm: Well, 2013, I would think may be a date. Could be 2012 or 2014, or whatever. The exact year is not of the essence.

What indications have you received from the SEC that the monitoring group and funding systems you are now working to set up would be sufficient for the SEC to accept IFRS as generally accepted accounting principles and still be in compliance with Sarbanes-Oxley?

Zalm: In our [earlier] roundtable in London, the SEC representatives supported the proposals which we put on the table, so that's a good sign.

A July 5th article in the New York Times reported that some critics worry that a change to IFRS would "put American investors at the mercy of overseas regulators who enforce weaker rules and may treat investment losses as a low priority." What are your thoughts on that?

Tweedie: I think it is absolute nonsense. The SEC is going to look at the accounts that are coming in. And remember, the countries around world aren't just going to throw away their own accounting standards if they thought we were bringing out a set of standards that aren't very good.

Interestingly enough, we have been looking at disclosures on IFRS and U.S. GAAP, just on a sample basis. Actually, you get far more disclosures under IFRS than you do under U.S. GAAP.

The same article said the rules "give companies greater latitude in reporting earnings" and say on average companies report higher earnings using IFRS. How do you respond?

Tweedie: It would be quite interesting to see how they've done that research. You'd have to restate everything back into U.S. GAAP [to prove that]. Undoubtedly the standards have slight differences. One of the things we've been doing is looking, with FASB, at five areas where there are fundamental problems with the standards and trying to work out how in fact, within the next three years, we can complete that memorandum of understanding. And by that time, U.S. accounting and IFRS will be very, very similar.

We reported recently on the FASB mid-year update in which FASB member George Batavick said financial statement presentation, lease accounting, and several of projects have been accelerated, which he said was being accomplished through "dramatic scope change." For example, he said the lease accounting project now will focus only on lessee accounting, not that of lessors. Will you still be able to reduce the substantial differences between IFRS and U.S. GAAP if these projects have been slimmed down?

Tweedie: Well, [with regard to accounting for] lessors, a lot of that will be tied up with revenue recognition [which is also being fast-tracked].

Take leasing for example: You've got a $600 billion U.S. industry worldwide. At the moment, very little in the way of leases are on balance sheet, either under U.S. GAAP or under IFRS. The scope changes were simple in a sense: One of the big difficulties with leasing is if you lease something for seven years, and you have an option to do another seven, how do you value the option? Well, let's take a guess. But even if we don't get to the stage of valuing the option, if we make them book the existing liability, that is going to put billions of dollars on balance sheet. That is a huge difference — much, much better that we've got at the present.

So while we are taking about scope change, what we are really doing is pulling it down to the core of the standard and saying is it worth doing it? The answer with leasing is an emphatic "yes." And the same with pensions: Get rid of all the smoothing devices, which has been done in the United States and UK. But then we're going on further, we'll actually tackle the gains [being reported from] the pension funds. Warren Buffett has actually written to some of these companies, saying he's an expert investor, but how are these guys getting the returns they are claiming? These are things we are going to do. While it's scope change, we're still making big improvements.

The New York Times article also quoted Senator Carl Levin, a Democrat, as saying that the United States can't delegate or cede control to regulators overseas. Do you have any concerns that the move to IFRS and IASB's goal of becoming the world's accounting standard-setter could become a political issue in the upcoming election, or be derailed by a Democratic administration?

Zalm: Well, as a former politician [Zalm is former Deputy Prime Minister and Minister of Finance of the Netherlands], I surely hope not. I think if there is any subject where politicians should not politicize, it is accounting.